The RBI is likely to keep the benchmark interest rate unchanged for one more time in its bilateral monetary policy review later in the week as inflation has breached its upper tolerance limit and may also moderate the growth forecast given the disappointing second quarter GDP numbers, experts say. Reserve Bank Governor-headed six-member Monetary Policy Committee (MPC) is scheduled to meet on December 4 to 6, 2024. The decision of the rate-setting panel will be announced on December 6 by Governor Shaktikanta Das.
It was widely anticipated that the RBI would start reducing the benchmark interest rates soon but the central bank will have little option this time around as the latest print of retail inflation is above 6 per cent.
The Reserve Bank has kept the repo or short-term lending rate unchanged at 6.5 per cent since February 2023 and experts think some easing could only be possible in February.
Madan Sabnavis, Chief Economist, Bank of Baroda said given the rather uncertain global environment and the possible impact on inflation and the fact that currently inflation has been averaging close to 5.9 per cent in the last two months, a status quo on repo rate will be the logical outcome from the policy.
“There would be a change in RBI projections for both inflation and GDP as inflation has been higher so far than the RBI forecast for Q3 and GDP growth has come much below expectations in Q2. It would hence be of interest to see what the projections this time are,” Sabnavis said.
India’s economic growth slowed to near two-year low of 5.4 per cent in the September quarter of this fiscal due to poor performance of manufacturing and mining sectors, but the country continued to remain the fastest-growing large economy, as per government data released on Friday.
Aditi Nayar, Chief Economist and Head – Research & Outreach, ICRA, said that with the CPI inflation having breached the 6 per cent upper limit of the medium-term range of 2-6 per cent in October 2024, ICRA anticipate a status quo from the MPC in its December 2024 meeting, in spite of the GDP growth print for Q2 FY2025 sharply undershooting the committee’s expectations.
“At the same time, we anticipate that the MPC will moderate its growth forecast for FY2025 next week. A February 2025 rate cut may be forthcoming if the next two inflation prints recede,” Nayar added.
The government has tasked the RBI to ensure that consumer price index (CPI) based retail inflation stays at 4 per cent with a margin of 2 per cent on the either side.
The central bank last hiked the repo rate to 6.5 per cent in February 2023 and since then it has held the rate at the same level.
The RBI kept the repo rate unchanged at 6.5 per cent in its last bi-monthly review (October) also amid risks from higher food inflation.
On expectations from MPC, Dhruv Agarwala, CEO, Housing.com and PropTiger.com opined that the Reserve Bank faces the challenging task of striking a fine balance between boosting GDP growth and containing inflation.
“Initially, the sharp rise in inflation seemed to rule out the possibility of a rate cut. However, with growth deceleration becoming a pressing concern, the RBI may still consider a rate cut in the upcoming policy meeting, despite mounting inflationary pressures and a persistently challenging global environment,” he said.
Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank said that the sharply lower than expected GDP figures reflect the highly disappointing corporate earnings data. The manufacturing sector appears to have taken the maximum beating.
“The high-frequency data suggests that festive linked revival in activity may provide a marginally better 2H growth figure but overall GDP growth for FY25 is going to be around 100 bps lower than RBI’s estimate of 7.2 per cent. Despite the sharp slowdown in GDP growth we maintain our view of a pause by the RBI…given elevated inflation and uncertain global environment,” Bhardwaj added.
In its October policy, the RBI had projected real GDP growth for 2024-25 at 7.2 per cent with Q2 at 7 per cent; Q3 at 7.4 per cent; and Q4 at 7.4 per cent.
Sanjay Bhutani, Director, Medical Technology Association of India (MTaI) said: “In light of these competing priorities, the Monetary Policy Committee may adopt a wait-and-watch approach for now and hence, we expect it to maintain a status quo stance.”
In an off-cycle meeting in May 2022, the MPC raised the policy rate by 40 basis points and it was followed by rate hikes of varying sizes, in the subsequent meetings till February 2023. The repo rate was raised by 250 basis points cumulatively between May 2022 and February 2023.
